SBI Life - Primary Offer: Betting on life

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Good product mix and low expense ratio should stand the life insurer in good stead

The growth of life insurers was impacted by the regulatory changes brought about by Insurance Regulatory and Development Authority of India (IRDAI) in 2010 and 2013. In 2010, the IRDAI introduced changes to unit-linked insurance products (ULIPs), including a cap on charges, surrender and discontinuance charges, and minimum levels of sum assured.

In 2013, IRDAI issued regulations to link commissions to the premium paying term and to discontinue highest net asset value guarantee products, among other tweaks. The 2010 changes impacted the sale of ULIPs while the axe fell on non-linked products in 2013. Since then, life insurers have re-structured their product portfolios to comply with the regulatory norms.

From focussing on gaining market share through first year premium growth, insurers have been looking at cost rationalisation and persistency (a measure of total business the company retains in a financial year without policies getting lapsed or premiums being lost to other insurers.). With the tide turning over the last two years, private sector players, in particular, have regained significant market share, driven by healthy demand of unit linked products (ULIPs).

SBI Life is the largest private life insurer in terms of new business premium (NBP), with a market share of 20 per cent in FY17. Its market share has been on the rise the past three years (from 15.8 per cent in FY15). Between FY15 and FY17, its NBP grew 35.4 per cent annually; private players and LIC grew 20.5 per cent and 26 per cent respectively over this period.

Embedded value

Though the business remains on a strong footing, the asking price of the IPO is expensive. Deals in the life insurance space have taken place at one to three times the embedded value of the life insurance business. Embedded value is a measure that, among other parameters, takes into account the company’s future earnings.

At the upper end of the price band of ₹685-700, the IPO values SBI Life at ₹70,000 crore, or 4.2 times its embedded value as of March 2017. In December 2016, SBI sold its 3.9 per cent stake in SBI life for ₹460 a share, which valued the insurance company at ₹46,000 crore, about 3.5 times its embedded value. ICICI Prudential Life, which listed last year, trades at 3.8 times its embedded value as of FY17. After a lukewarm listing on account of a seemingly high valuation, the ICICI Pru Life stock has gained around 27 per cent from its listing price.

For SBI Life too, given its high valuation, listing gains could be limited. But given the strong profitability, healthy growth and sound business fundamentals, investors with a long-term horizon can subscribe to the issue. The IPO is an offer for sale (OFS) of 12 crore equity shares, reserving 1.2 crore shares for SBI shareholders. Leveraging its diverse product portfolio, SBI Life has gained market share and delivered strong growth over the last three years.

Life insurance policies are broadly categorised into traditional and ULIP policies. Diversification is important, as dependence on a single product can be risky from a regulatory perspective, much like what happened to ULIPs in 2010 and NAV guaranteed products in 2013.

SBI Life’s well-balanced product mix gives it an edge over other players whose product portfolios are skewed in favour of either ULIPs or traditional policies. For instance, ICICI Pru has a higher proportion (79 per cent of NBP) of ULIPs. As of FY17, SBI Life’s product portfolio is equally split between traditional and ULIP policies (50 per cent each in terms of NBP).

For both insurers and investors, the long-term nature of a life insurance product is important, as most of the expenses are taken upfront and the return is generated over the life of a policy. Hence, persistency in life insurance policies is a critical factor.

Persistency has been steadily moving up for top private players over two to three years. SBI Life saw its 49th month persistency ratio by premium (5th year after the policy issue) improve from about 34.5 per cent in FY15 to 62.4 per cent in FY17. The improvement in the 61st month persistency has been sharper across all insurers during this period. This is because it takes into account policies post April 2010, which requires longer lock-in period (from three years earlier to five years). For SBI Life 61st month persistency ratio improved sharply from 9.6 per cent in FY15 to 67.1 per cent in FY17.

Also, with the focus now on sustainable growth, better product design has also helped insurers improve persistency.

Strong profitability

SBI Life has the lowest operating expense ratio among the top five private life insurers (in terms of total premium). In FY17, SBI Life’s operating expense ratio stood at 7.83 per cent. SBI Life’s solvency ratio — essentially, the excess of assets over liabilities — stood at 211 per cent as of June 2017, above the minimum regulatory requirement of 150 per cent. Its strong return on equity of over 19-22 per cent over the past three years is a key positive.

Channel strength

Distribution is a critical part of the insurance industry, given the push nature of the product. In the last four to five years, bancassurance-led players have gained market share at the expense of agency-led players. While for some time to come, the bancassurance model will continue to drive market share gains, over the long run, the agency channel is equally important. Insurance players that have a diversified distribution model will be better placed to drive growth.

SBI Life has a comprehensive multi-distribution model. While its agent network is strong with 95,177 agents as of July 2017, its bancassurance network with SBI, gives it an edge over other players. Bancassurance contributed 53 per cent of SBI Life’s NBP in FY17, while individual agent network and others contributed 22.3 per cent and 24.6 per cent respectively of its new business premium, in FY17.

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